The economic evidence is quite clear that state right-to-work (RtW) laws do not reduce wages, though a few seem desperate to convince us otherwise. In fact, RtW has proven to be an unambiguous economic tonic for states that have enacted such laws (though perhaps not for union lobbyists). Note that this has nothing to do with comparisons of nominal wage levels in RtW vs. non-RtW states, as organizations like the left-wing Economic Policy Institute (EPI) are wont to make. Adjusting for the cost of living often shows a different result. Either way, the recency of RTW laws in many states means that those differences tend to be legacy effects and are not useful as a gauge of the incremental impact of RtW laws.

It’s no coincidence that RtW laws have gained favor as a mechanism for encouraging economic growth in historically low-wage states. The efforts have been largely successful. Jeffrey Eisenach reported the following findings in 2015:

“RTW laws directly affect economic performance through their impact on business location decisions, especially in heavily unionized industries such as manufacturing. Other things being equal, businesses are more likely to locate in states with RTW laws. There is also evidence that RTW laws have a direct, positive effect on employment, output, and personal income.

RTW laws do not lead to lower average wages in either unionized or non-unionized industries. There is some evidence that the long-run effect of RTW laws is to raise wage rates as a result of increased productivity.

RTW laws also affect economic performance indirectly through lower rates of union density. The weight of the evidence indicates that lower union density is associated with higher levels of employment, increased investment and R&D spending, and increased innovation.”

Mark Mix reports similar evidence, including more rapid employment growth and larger wage gains in RtW states. And James Sherk addresses some of the myths surrounding RtW, including the misleading narrative that RtW reduces wages and that RtW is unpopular among the American public. Indeed, Sherk quotes a Gallup poll finding that Americans support right-to-work laws by more than a 3 to 1 margin, though it’s not clear how well the average American understands the issue.

A disturbing aspect of the opposition to RtW is an effort to disparage the business community by characterizing private enterprise as exploitative. I leave you with some wisdom from Bran Caplan on that point (HT: Don Boudreaux):

“Businesses produce and deliver virtually all of the wonderful, affordable products that we enjoy.Contrary to millennia of economic illiterates, businesses rarely do so by ‘exploiting’ their workers. Instead, businesses provide gentle but much-needed leadership. Left to our own economic devices, most of us are virtually useless; we don’t know how to produce much, and we don’t know how to find customers. Businesspeople solve these problems: They recruit workers, organize them to vastly raise their productivity, then put these products in the hands of customers all over the world. Yes, they’re largely in it for the money; but – unlike every government on Earth – business rarely puts a gun to your head. Businesses assemble teams of volunteers to meet the needs of willing consumers – and succeed wildly.” (emphasis Caplan’s)

An analysis by the Economic Policy Institute (EPI) is the basis for breathless claims by the Left that a substantial increase in the minimum wage would have “sweeping benefits for low-income families.” The EPI study purports to show that spending on public assistance will decline significantly with the increase in the minimum wage. Author David Cooper’s analysis is purely static, dressed up with a few linear regression equations relating participation in federal welfare programs to the wage distribution. However, his conclusion is preordained by the very design of the analysis, which relies on pooled data from public assistance programs across 2012 – 2014. This was a period over which wages were generally rising, but the federal minimum wage was constant (and only a few state minimum wages were increased).

It’s no surprise that higher wages are associated with a reduced likelihood of receiving needs-based public assistance in a cross section. That’s not quite the same as measuring the dynamic impact of an increase in the minimum wage. The adjustment to a higher wage floor involves more complex shifts in the structure of the economy, including higher prices, a higher incidence of small business failure and the substitution of automated systems for labor. And celebration would not be in order if the policy change prompted a deterioration in the employment prospects of the least-skilled workers, and it would.

There are a few gaping holes in the EPI analysis. One involves a data limitation whereby the distribution of public assistance by wage decile is related to individual workers or their families. It is one thing to say that most recipients of public assistance work for a living. It is quite another to say “Most recipients of public assistance work or have a family member who works.” Obviously, the latter does not imply the former, yet the analysis asks you to accept that the wage rates of family members who perform work during a year are the determining factor in welfare program participation, rather than the employment status and hours of all members of the household.

The analysis includes cross-sectional regressions relating the receipt of public assistance (yes or no) to wages imputed at the individual level, controlling for a complex function of age (polynomial terms), other demographic factors and part-time work status during the previous year. As stated above, the data are plagued by measurement issues. Furthermore (and this is a technical critique), linear regression is not an appropriate statistical methodology with a binary dependent variable. The author should have known better, but we’ll leave that aside.

Controlling for part-time status is intended to create a more reliable estimate of the effect of wages on program participation, as part-timers are more likely to earn low wage rates. But if hours matter in that way, then the regression is all the more suspect because hours of work are otherwise ignored (except in the imputation of wage rates).

The truth is that poverty is not a wage problem as much as a jobs and hours problem. A recent post by Angela Rachidi of the American Enterprise Institute notes that “Only 11.7% of poor working-age adults worked full-time for the entire year in 2014.” Impoverished individuals who work full or part-time are concentrated in low-skilled occupations. Those are likely to be the same kinds of jobs for which impoverished non-workers might otherwise compete. Many of those jobs are at or near the minimum wage, but increasing the wage floor will only exacerbate the problem of unemployment or underemployment.

An increase in the minimum wage might help those workers who are able to keep their jobs. Unfortunately, if they remain employed, they are likely to suffer non-wage repercussions at their jobs. Therefore, the size of the net economic gain for those lucky enough to keep their jobs is open to question, though their measured income will rise. Still, keeping your job may be a big challenge.

The EPI analysis pays no heed to the negative employment effects of changes in the minimum wage. These stem from employers’ efforts to control costs, hiring only when the skills and expected productivity of a worker exceed the cost. Growth and job opportunities are thus quashed by the intervention, including the gain in skills that comes with experience. If a business hikes price to defray higher labor costs, the negative impact on customers will induce them to buy less, reducing the need for labor. Another possible impact may be caused by the so-called “welfare cliff“, or the tendency of many program benefits to decline as income rises, which imposes a marginal tax rate on beneficiaries’ labor income. A higher wage floor might induce a worker to reduce hours to avoid the cliff, if their employer allows it, or it might induce another employed member of the same household to reduce hours.

Here is the extent of EPI’s treatment of the negative employment effects of a higher minimum wage, quoting the Congressional Budget Office (CBO):

“CBO predicts that federal expenses would initially go down, but could later increase if the higher minimum wage has a significant negative effect on employment. On net, they conclude that ‘it is unclear whether the effect for the coming decade as a whole would be a small increase or a small decrease in budget deficits.’ It is important to note that the CBO’s ambiguity on this point is driven by their atypically high estimates of the probability of significant employment loss stemming from such an increase. If employment loss is insignificant (as most research on a minimum-wage increase of this magnitude indicates), the budget savings would surely dominate.” [Emphasis added]

“The evidence indicates that even as individuals reach their late 20’s, they earn less and perhaps work less the longer they were exposed to a higher minimum wage at younger ages. The adverse longer-run effects of facing high minimum wages at young ages are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.“

In a strong sense, EPI’s findings and conclusion are beside the point for the many low-skilled workers whose jobs would be at risk, as well as those who might never be given legitimate employment opportunities under a higher wage floor. Those erstwhile workers and job seekers are generally the least skilled and most in need of experience. But EPI, and unthinking living wage advocates, are all too eager to signal the humanity and virtue of their favored policies, foolishly ignoring the negative and inhumane employment consequences.

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun